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An empirical assessment of non-linearities in models of exchange rate determination

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Author Info
Richard A. Meese
Andrew K. Rose

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Abstract

This paper examines the empirical relation between nominal exchange rates and macroeconomic fundamentals for five major OECD countries. Five theoretical models of exchange rate determination are considered. Potential non-linearities are examined using a variety of parametric and non-parametric techniques. We find that the poor explanatory power of the models considered cannot be attributed to non-linearities arising from time deformation or improper functional form.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 367.

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Date of creation: 1989
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Handle: RePEc:fip:fedgif:367

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Keywords: Foreign exchange rates;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Lucas, Robert Jr., 1982. "Interest rates and currency prices in a two-country world," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 335-359. [Downloadable!] (restricted)
  2. Clark, Peter K, 1973. "A Subordinated Stochastic Process Model with Finite Variance for Speculative Prices," Econometrica, Econometric Society, vol. 41(1), pages 135-55, January. [Downloadable!] (restricted)
  3. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February. [Downloadable!] (restricted)
  4. Stock, James H & Watson, Mark W, 1988. "Variable Trends in Economic Time Series," Journal of Economic Perspectives, American Economic Association, vol. 2(3), pages 147-74, Summer. [Downloadable!] (restricted)
  5. Stock, James H, 1987. "Measuring Business Cycle Time," Journal of Political Economy, University of Chicago Press, vol. 95(6), pages 1240-61, December. [Downloadable!] (restricted)
  6. Domowitz, Ian & Hakkio, Craig S., 1985. "Conditional variance and the risk premium in the foreign exchange market," Journal of International Economics, Elsevier, vol. 19(1-2), pages 47-66, August. [Downloadable!] (restricted)
  7. Abel, Andrew B., 1988. "Stock prices under time-varying dividend risk : An exact solution in an infinite-horizon general equilibrium model," Journal of Monetary Economics, Elsevier, vol. 22(3), pages 375-393. [Downloadable!] (restricted)
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  8. Diebold, Francis X. & Nason, James A., 1990. "Nonparametric exchange rate prediction?," Journal of International Economics, Elsevier, vol. 28(3-4), pages 315-332, May. [Downloadable!] (restricted)
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  9. Garry J. Schinasi & P.A.V.B. Swamy, 1987. "The out-of-sample forecasting performance of exchange rate models when coefficients are allowed to change," International Finance Discussion Papers 301, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  10. Richard Baldwin & Richard K. Lyons, 1988. "The Mutual Amplification Effect of Exchange Rate Volatility and Unresponsive Trade Prices," NBER Working Papers 2677, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. Cleveland, William S. & Devlin, Susan J. & Grosse, Eric, 1988. "Regression by local fitting : Methods, properties, and computational algorithms," Journal of Econometrics, Elsevier, vol. 37(1), pages 87-114, January. [Downloadable!] (restricted)
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